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This is the first of a two-part series and will focus on Supplier Performance Scorecards. On Friday, the second blog in this series will explore Supplier Stratification.
Supplier performance scorecards and supplier stratification modeling are related concepts, but very different in how they should be used. A supplier performance scorecard program should be used between an organization and its suppliers as a means of evaluating the performance of the suppliers against mutually agreed upon or accepted criteria. Supplier stratification should be an internal metric, where an organization takes other criteria (one of which can be the scorecard metric) and combines them to rank its suppliers (traditionally in an ABCD type model). The information below will help guide anyone wanting to implement either concept in their organization. Successful implementation of these concepts will have a positive impact on supplier relationships, operational efficiency, and improvement of EBITDA.
Supplier Performance Scorecarding (SPS)
Most organizations that have a scorecard methodology for their suppliers will likely admit (begrudgingly) that they are not entirely happy with the results of their scorecarding. There are many possible reasons for this, ranging from complexity of factors used, to required manual input, suppliers lacking buy-in, and acceptance of the scorecards, etc.
A scorecard or performance measurement program is critical in the development and maintenance of supplier relationships, as it provides quantitative measurements that can be used to engage suppliers about improving their performance and incentivize them to do so (especially if high scores mean new opportunities for the supplier). Having a program that is well developed and executed helps keep suppliers focused on their internal process improvements, which will ultimately impact your organization’s business goals.
The scorecard should be shared with your suppliers as often as possible, in order to keep communication about metrics fresh in their minds and to keep them abreast of their performance. Far too often, organizations share these scorecards only once a year…during pricing negotiation meetings. That is not the time to use a scorecard.
Common SPS criteria
One of the biggest challenges to a successful SPS is accuracy of data. For example, on-time delivery is usually one criterion in SPS, but the supplier often uses the date of shipment as the target date for calculation, while the organization will use the receipt date. The time in transit is sometimes a frustrating challenge, because a supplier often loses the ability to control the actual delivery date once the shipment has left their facility. And some organizations may leave a container or package sitting in a receiving area for a few days before acknowledging or recording receipt, further complicating the accuracy of the data used for SPS.
Commonly used criteria for a supplier scorecard include the following:
This criterion is tricky. Many organizations use it incorrectly and score their suppliers on whether or not sell prices increased over the previous year, even after contract pricing negotiations have occurred and the current pricing was agreed upon. A better method is to look at price from a variance standpoint, meaning, is the price agreed upon at the time of order also the price that the organization was
Utilizing an on-time metric for this criterion is a no-brainer, but one that must be accurately defined. If “on-time” means on the exact day delivery was requested, then it needs to be clearly expressed to the supplier and agreed upon mutually. If it is a window of delivery (say, seven days earlier than delivery date requested and never late), then that should be the expressed and agreed upon date.
Quality is a key performance metric that many organizations have difficulty defining as well as tracking. Quality should not just address whether or not the product ordered was delivered undamaged and in a usable condition. It should also reflect whether or not the product performed correctly and for the acceptable period of time (i.e., the warranty period), as well as the ratio of returns to the supplier.
When determining a supplier’s final score, it’s critical that the criteria used are given weights. The weights assigned to each criterion will vary among organizations, reflecting the importance of each factor to a particular organization. Here is an example of how an organization might weight its factors:
Calculating supplier scores and final rankings can involve more detailed statistical analysis, and some mathematical explanations were skipped in the examples above, but the proof of concept should be apparent.
The examples above used the Price, Delivery, and Quality criteria for the purpose of simplicity, and it should be noted that there are many more (possibly better suited) criteria that can be used to determine a supplier scorecard. Texas A&M University’s® Industrial Distribution program has used the concept of a Supplier Performance Index (SPI) with four metrics-based criteria that easily allow suppliers to be scored methodically.
Stay tuned for the second part of this series, Supplier Stratification, on Friday.
Brad Vance is a Senior Business Process Consultant with the Business Consulting Services group of Epicor Software. Having earned a Bachelor degree from Adrian College and a Master of Industrial Distribution from Texas A&M University, Brad uses his 15+ years of industry experience to bring value to distribution and manufacturing organizations alike. With a strong background in operations and customer service, Brad provides leadership in increasing efficiencies while also improving the bottom line. For more information, please visit www.epicor.com.